Industry 4.0 Scenario Planning How will the industry 4.0 transformations affect SMEs in Germany

Industry 4.0 Scenario Planning

How will the industry 4.0 transformations affect SMEs in Germany by 2030?

Master of Science International Management

Research project presented by:

Anna Pereshybkina (255584)

Maria Eugenia Castillo Conde (255522)

Tom Kalyesubula (255518)

Under the supervision of:

Prof. Dr. Eva Kirner

JULY 2017

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Abstract

Digitalization is invading every aspect of our lives and modern technologies are at the helm

of much disruptive change in all spheres of life. Hailed as the 4th industrial revolution

every company has a mind to understand the implications of the Industry 4.0 suit of

technologies and their multiple innovative applications for its operations. In this paper, we

explore how the industry 4.0 transformation might affect Small and Medium sized

enterprises in Germany over a 15-year horizon. We focus on SMEs because they play a

significant role in ensuring the prosperity of Germany as a global industrial and economic

powerhouse. We develop alternative pictures of the possible futures using the foresight

technique of Scenario planning in which the factors that shape the business environment

SMEs and indeed all companies operate in are identified and used to build the most

plausible alternative realities. The outcome is four distinct scenarios that reflect the possible

growth trajectories regarding the impending transformation for SMEs.

Keywords: Industry 4.0, German SMEs, Scenario planning, digitalization

Key findings

§ There is much expectation around Industry 4.0, but SMEs have real obstacles that

also make the associated fear tangible. Many stakeholders and indeed SMEs are

uncertain due to the disruptive nature of the innovation associated with the

transformation.

§ Achieving the industry 4.0 transformations will require the coordinated action from

a wide range of stakeholders like government, industry associations and private

sectors.

§ The future of SMEs in connection to the coming transformation is not

predetermined. The four scenarios illustrate this with consistent and insightful

alternative futures that above all expose critical issues to consider in building a

transformation ready environment that includes SMEs.

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CONTENT

Abstract ................................................................................................................................... 2

Introduction ............................................................................................................................ 5

1. Industry 4.0 ......................................................................................................................... 6

1.1 Theoretical basis of industrial revolutions .................................................................... 6

1.2 Industry 4.0 and nine driving trends of the fourth industrial revolution ....................... 7

1.3 Benefits of Industry 4.0 ............................................................................................... 11

2. Small and Medium-Sized Enterprises in Germany .......................................................... 12

2.1 Challenges for German SMEs in the 4th industrial revolution .................................... 13

3.1 Methodology ................................................................................................................... 13

3.1 The origins of Scenario Planning ................................................................................ 13

3.2 Scenario as a planning tool ......................................................................................... 14

3.3 The scenario building technique ................................................................................. 16

4. Team methodology and process ....................................................................................... 17

4.1. Infrastructure .............................................................................................................. 18

4.2. Technology and Innovation ....................................................................................... 19

4.3. Finance ....................................................................................................................... 19

4.4. Politics (national program, security, legislation) ....................................................... 20

4.5. Education & Qualification ......................................................................................... 21

4.6. Integration .................................................................................................................. 22

5. RESULTS ......................................................................................................................... 24

5.1 Scenario S-5 (Rank 1) – Watch out! The future is coming! ....................................... 24

5.2 Scenario S-2 (Rank 2) - Digital Darwinism ................................................................ 26

5.3 Scenario S-4 (Rang 3) - The missing link ................................................................... 27

5.4 Scenario S-1 (Rang 5) - Verging on Extinction .......................................................... 28

6. Discussion of Results ........................................................................................................ 29

7. Conclusion ........................................................................................................................ 30

8. Annex ................................................................................................................................ 31

8.1 List of final descriptors ............................................................................................... 31

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Bibliography ......................................................................................................................... 69

LIST OF FIGURES Figure 1: The nine Technological trends behind the 4th Industrial Revolution…………….8

Figure 2: The path of a scenario………………………………………………………...… 15

Figure 3:Eight steps of the scenario planning technique………………………………….16

Figure 4: Example of Consistency Matrix and assignment of values…………………….. 23

Figure 5: Consistency Sum after running the program INKA 4………………………….. 24

LIST OF TABLES Table 1: Values and interpretations for Consistency Matrix………………………...…… 23

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Introduction The fourth industrial revolution, which is also called Industry 4.0, was developed as a part

of widely established German high-tech strategy aiming to maintain global leadership and

competitive advantage in manufacturing sector. Nowadays it is the most frequently

discussed trend not only at the academic level but also in the business environment because

it is the next stage of industrialization that will change the entire value creation chain

increasing interconnectivity of physical and digital worlds (Gilchrist 2016; Kagermann et

al. 2013).

The peculiar features of Industry 4.0 advanced technologies are the introduction of Internet

of Things and Services into production and implementation of Cyber-Physical Systems that

represent a significant potential for optimization of manufacturing and business processes.

The core idea lies in creating a dynamic, self-ordained smart production system enabling

producers to meet the individual customers requirements and fulfill the last-minute changes

in orders. In addition, Industry 4.0 technologies increase productivity and resources

efficiency taking into consideration current demographic trends and changing attitudes in

society toward life-work balance (Kagermann et al. 2013).

However, the digital revolution provides SMEs with an opportunity to specialize and

develop downstream services, it also represents significant challenges associated with data

protection, sound financial resources needed, development of comprehensive strategy to

implement new technologies, availability of qualified employees and developed IT

infrastructure. As a result, SMEs that are the pillar of German economy remain cautious

toward adoption of Industry 4.0 technologies (Schröder 2016). The high level of

uncertainty and risk regarding future development of SMEs gave the basis for the research

question, which was formulated as follows:

How will the industry 4.0 transformations affect SMEs in Germany by 2030?

The research question is supplemented by several research objectives:

§ Provision of the panorama of Industry 4.0 technologies and their economic impact

§ Illustration of the importance of SMEs for German economy and introduction of the

challenges that might be faced in terms of Industry 4.0 transformation

§ Determination of relevant areas of influence

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§ Development of consistent scenarios that describe future possibilities of Industry

4.0 transformations for SMEs

In order to answer the research question, achieve objectives and develop possible future

using scenario-planning technique, the first chapter of the paper introduces the brief

historical overview of industrial revolutions and provides the definition, the main elements

and distinguishing characteristics of the Industry 4.0 disruptive technologies. In the second

chapter the importance of small and medium-sized enterprises (SMEs), so called

“Mittelstand”, is given illustrating the role in German economy. The third part focuses on

the theoretical essence of the scenario planning technique, as the main methodology of the

research, whereas, the practical implementation including the introduction of the INKA 4

software and team process are given in the fourth part. Finally, the fifth chapter introduces

the scenarios obtained as the results of the research and clarifies the limitations of the

conducted study.

1. Industry 4.0

1.1 Theoretical basis of industrial revolutions

An industrial revolution is a complex of technological innovations which create a modern

economy by replacing animal / human effort and skill with machines and inanimate power.

In many circles of historians, the phrase also denotes a rapid technological change that has

a large impact or significance (Landes 2003). Gregory Clark estimates that the first

industrial revolution started in Britain around 1760 because before then the average rate of

growth in efficiency resulting from technological advancement all over the world was close

to zero. By 1860 the rate had risen to 0.5 percent per year (Clark 2013). More recently, a

positive correlation has been drawn between the acceleration and the level of innovation by

examining patent filing records. After 1760, patent filings increased to reflect the expansion

in industrialization primarily to support the textile industry. Brian Spear notes that after

James Watt´s patent on the steam engine was enforced successfully patenting increased

tremendously (Spear 2016).

As for the causes of industrial revolution, historians and economists put forward many

theories. Clark grouped them into three broad camps. The exogenous growth theories posit

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that exogenous events created the conditions for the revolution to take root. In contrast,

endogenous growth theories contend that industrialization was built into the human genome

as part of our evolutionary survival response and would be inevitably triggered once a

critical threshold was crossed in the advancement of efficiency. The third category are the

multiple equilibrium theories whose argument is that major shocks like disease and war

caused the shift from a Malthusian equilibrium as it were to a state of dynamic equilibrium

in which the revolution was forged (Clark 2013). While there is no clear consensus on the

root cause of the industrial revolution, the idea that a number of technological innovations

present in England at the time coalesced into a new technical system has gained more

acceptances among economic historians (Mokyr, Strotz 1998).

The first Industrial Revolution resulted into the transition from an agrarian economy into

the age of mechanical production. Coal was used to power production and wage labor was

born as productivity made huge leaps. Transport and logistics also improved a great deal

with the increasing use of steamboats and the railway train (Clark 2013). The 20th century

ushered in the second revolution, characterized by the introduction of the factory setting

and mass production. The former allowed affordable consumer production for mass

consumption. Electricity and crude oil replaced coal in powering mass production. Ford´s

work on assembly lines and Taylor’s study of the production process further increased

productivity (Mokyr, Strotz 1998). The next significant change came from the application

of electronics and information technology to the industrial process. Production underwent

many optimizations and automation starting in the late 1960s as computer use increased

(MacDougall July 2014). Fittingly, this transformation is also called the digital revolution

because it marks the transition into the information age where, with the help of computers

machines are controlled and coordinated just as processes and suppliers are integrated on a

global level (Wolter et al. 2015).

1.2 Industry 4.0 and nine driving trends of the fourth industrial revolution

The term “Industrie 4.0” was created in 2011 originating from a project of the German

government to promote the computerization and modernization of manufacturing. The term

represents the increasing digitalization of the production process and the factory as a unit of

production. Industry 4.0 refers to the technological evolution from embedded systems to

cyber-physical systems (CPS) capable of creating intelligent object networking and

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independent process management across real and virtual worlds (MacDougall July 2014).

According to Gilchrist, CPS integrates computation, networking, and physical processes

allowing embedded computers and networks to monitor and control the physical processes.

(Gilchrist 2016).

Figure 1: The nine Technological trends behind the 4th Industrial Revolution (Rüßmann et al. 2015, pp. 3)

The effect of a synergetic convergence of key digital technologies is the driver of the 4th

industrial revolution (Gilchrist 2016). According to Rüßmann, the whole revolution rides

on nine main technological trends that in tandem drive the interconnection of all sensors, IT

systems and machines through the entire value chain (Rüßmann et al. 2015). These trends

range from the use of autonomous robots, Internet of things, Big Data and Analytics,

augmented-reality-based systems, cyber security, cloud computing, additive manufacturing,

to horizontal and vertical system integration (Figure 1) (Rüßmann et al. 2015).

The first driving force of Industry 4.0 is the recent emergence of Big Data Analytics.

According to Oracle, data makes the transition to big data when the volume, velocity and

variety exceed the capacity of ordinary IT systems to capture, store and analyze it. The

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aspect of analytics refers to a set of activities undertaken to derive useful insight from large

data sets (Oracle Corporation March 2013). Big Data Analytics provides a great benefit for

companies that conduct analysis based on large sets of data enabling them to reduce energy

consumption, optimize production and improve services (Gilchrist 2016). In addition, data

has become a key aid for decision making due to the abundance of both structured and

unstructured data types, ranging from call detail reports, video cameras and equipment

sensors to data from social networks. The standard process in dealing with the diverse data

streams is warehousing, preprocessing and finally summarizing to make trend associations

which are then consumed in an organization by traditional business intelligence tools

(Oracle Corporation March 2013).

The second building block of digital technologies is the implementation of autonomous

robots to tackle complex tasks. However, these tasks are not new in manufacturing with

development of Industry 4.0 they are becoming more autonomous, cooperative and flexible.

In future, they will have a wider range of capabilities less costly than they are today. In

addition, in the manufacturing process, it is crucial to create a virtualized model of the

physical world, which includes humans, machines, and materials to test and optimize

production line in the virtual world in order to increase product quality and avoid errors in

reality. Production processes with Industry 4.0 technologies use a 3-D simulation of

manufacturing in the engineering phase, but in future these simulations will be extended to

operations in plant leveraging real-time data, which saves time for machines’ adjustment

(Gilchrist 2016).

The fourth technology that is transforming industrial production is horizontal and vertical

system integration. The aim of Industry 4.0 is to develop IT systems that will link

engineering, production, marketing and after-sales services as well as companies,

departments, capabilities, and functions. Evolving data-integration networks will create

fully automated value chains. Nowadays, despite highly developed IT systems, companies,

suppliers, and customers are not linked closely, which also means that processes from

enterprise to shop floor are not integrated (Gilchrist 2016).

The next trend regarding Industry 4.0 is the spread of the Internet of Things (IoT). A clear

definition of this term derives from the Cisco Internet Business Solutions Group (IBSG),

according to which IoT is a point in time when more objects or things are connected to the

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Internet (Dave, 2011). Today, computing systems are implemented only in some machines

and manufacturer’s sensors that are organized in the vertical automotive chain with limited

interaction. The industrial Internet of things will make it possible to connect transducers

and machines in order to enable them to communicate and interact with each other and also

to connect them to centralized controllers and managing systems. In addition, industrial

Internet of Things decentralizes decision-making and analytics to provide a real-time

response (Gilchrist 2016).

Rising connectivity and standardization of production protocol increases the importance of

protection of manufacturing processes from cybernetic threats. Recognition of

vulnerabilities and challenges caused by integration of processes and Internet production is

the main goal of cyber security. Some companies have already solved this problem to some

extent by joining forces with cyber security companies through partnerships or acquisition

(Rüßmann et al. 2015).

The other transforming technology is additive manufacturing such as 3-D printing, which

enables manufacturers to produce a small batch of customized products. The main

advantage of additive manufacturing methods are opportunities to create prototypes of

conceptual designs and individual components that reduce costs, increase time efficiency,

bring more value to customers, as well as, reduce transport distances (Rüßmann et al.

2015).

Today, augmented-reality-based systems are still in the primary stage, however, in the

future mobile devices will supply workers with real-time information concerning parts in a

warehouse and repair instructions, hence, improve decision-making procedures. Another

implication is maintenance and virtual training, which significantly decreases costs of

external experts (Gilchrist 2016).

The last driving trend is cloud technology because the concept of Industry 4.0 requires

broader data sharing within the value chain, which goes out of companies’ boundaries. In

the context of Industry 4.0, the cloud refers to the virtual space in which a large number of

operations are performed. Broadly defined, cloud computing facilitates ubiquitous and on-

demand network access to a shared pool of configurable computing resources. With limited

intervention from a service provider and minimum effort from management, the computing

resources are availed to an end user (Gamaleldin 2013). Cloud services include four

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categories: Software-as-a-service, Service, Platform-as-a-service, and Infrastructure-as-a-

service. These types are oriented on different customers and have different purposes,

however, all of them have the same business model, namely, renting computer resources

services, applications, infrastructures, and platform. The cloud service providers are

capable of developing clouds suitable for companies’ data storage and processing (Lin,

Chen 2012).

1.3 Benefits of Industry 4.0

Germany possesses significant production technologies and plant facilities, high level of IT

competencies, management qualifications as well as holistic innovative strategy targeted on

digitization of manufacturing processes, thus, enabling it to utilize numerous benefits that

the Fourth Industrial Revolution brings. According to Boston Consulting Group, in the next

years digital technologies will boost productivity by 5 to 8 percent, reducing cost by 15 to

25 percent depending on the industry. In addition, the development of smart factories

makes it possible to meet individual customers requirements on production of one-off items

through integrated IT systems that adjust production lines and flexible networking

throughout entire supplier chain. The increase in demand on customized products will bring

additional revenue of approximately €30 billion a year, which makes around 1 percent of

Germany’s GDP (Rüßmann et al. 2015; Kagermann et al. 2013).

The other value of the implementation of Industry 4.0 technologies is the opportunity to

solve challenges, concerning resource scarcity through increasing productivity of processes

throughout entire value network. Moreover, facing demographic and social changes, as well

as considering the talent shortage, assistance systems will provide flexible working

conditions encouraging work-life balance (Kagermann et al. 2013).

Germany has recognized the value and opportunities that Industry 4.0 technologies bring.

Large companies, anticipating potential benefits of digital era, have already started to

develop innovational strategies, business models and improve their business processes.

However, for SMEs, the implementation of Industry 4.0 technologies is associated with

significant challenges, thus, they remain relatively cautious regarding the fourth wave of

technological advancement (Schröder 2016).

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2. Small and Medium-Sized Enterprises in Germany

SMEs or small and medium-sized enterprises in Germany are known as the “Mittelstand”.

They are characterized by having less than 500 employees (make-it-in-germany.com,

2012). German SMEs are considered to be the strongest driver of innovation and

technology in the German economy, most of them specialized in niche markets (“Future of

the German Mittelstand” Mittelstand ” Action Programme, 2016) and hence, the backbone

of the German Economy (KFW, 2015).

German Mittelstand companies represent the 99.6% of all the German firms, which results

in more than 3.6 million companies. They range from traditional craft firms to pioneering

high-tech companies. Furthermore, they are in charge of creating 58.5% of jobs in Germany

(“Future of the German Mittelstand” Mittelstand ” Action Programme, 2016). Most of

them are known as European or even World leaders in their market (make-it-in-

germany.com, 2012).

Generally, SMEs in Germany are family-owned, led by the original owner and already in

business for generations. They are known for having a special mindset in the way they

manage the company. The low-hierarchies and close relations with customers allow them to

respond to changes in the market in time. It is due to their diverse and innovative

characteristics that they have been able to cope with many crises; this makes them in part,

responsible of the economic and social stability that has prevailed in Germany (“Future of

the German Mittelstand ” Mittelstand ” Action Programme, 2016).

It is important to mention that most of these companies are the most innovative in Europe.

Proof of this is that 54% of them launched an innovation onto the market from 2008 – 2010

(Federal Ministry of Economics and Technology, 2014). On the other hand, these

companies are very strong in the industrial sector, as well as a strong supplier of capital

goods on new markets all around the world (Federal Ministry of Economics and

Technology, 2014).

The role that SMEs have in Germany is significant, since they contribute 51.8% of the total

economic output (Federal Ministry of Economics and Technology, 2014). Most of these

SMEs enter the category of “Hidden Champion”, where they are world market leaders in

their niche, offer quality products and work closely with customers. In other cases, they are

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part of the supply chains for large companies (“Future of the German Mittelstand ”

Mittelstand ” Action Programme, 2016).

2.1 Challenges for German SMEs in the fourth industrial revolution Industry 4.0 carries many opportunities and challenges to German SMEs. Roughly 5% of

SMEs have adopted already the new disruptive technologies. However, just a third of them

are creating strategies towards its full adoption. The necessary changes for the full

implementation of Industry 4.0 within German SMEs are not easy. It takes the network of

various IT Systems and the infrastructure, which require resources that most of SMEs do

not count yet (Schröder, 2017).

On the other hand, there is a lack of standards and norms concerning data security, which

makes it difficult for SMEs to join collaborations for innovation and value chain networks.

Furthermore, there is an increased concern regarding the modification of the workplace and

the job losses that these transformations take. Nevertheless, it is fundamental that German

SMEs take action and develop the framework conditions, which are necessary for its

successful adoption.

3.1 Methodology

3.1 The origins of Scenario Planning

Scenario planning also known as contingency planning was first used as a method for

military planning by Herman Kahn and his colleagues at the Rand Corporation following

World War II in the 1950s and 1960s in order to build US military strategy and investigate

the possibilities of nuclear war that could have evolved between the US and the Soviet

Union. The main aim of this approach was to think about alternative future outcomes by

combining facts and logic. As a result he developed a scenario ‘nuclear war by

miscalculation’ that had a significant impact on a strategy of Pentagon In 1961 after the

establishment of Hudson Institute he started to embed this approach to public policy

planning and social forecasting (Bradfield et al. 2005; Wright 2000; The Economist 2008).

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In terms of business application, General Electric (the US conglomerate) was one of the

first companies that adopted scenario planning in the 1960s and 1970s. (Verity 2003),

however, it became known to management as a strategic tool only in 1970s and 1980s after

it was introduced by Pierre Wack at Royal Dutch Schell and Peter Schwartz at SRI

International (Stanford Research Institute at Stanford University) (Verity 2003; Bradfield et

al. 2005; Wright 2000). Work of Schell and SRI gave a rise to the ‘Intuitive Logics’ school

of scenario planning following Khan’s philosophy that a scenario is not a prediction but an

element of uncertain future that can affect strategic decisions. Intuitive approach based on

creative thinking, imagination, subjective ideas and storytelling using qualitative

information extends experiences and trends of today’s reality, in order to obtain different

pictures of the future that enable managers to build long-term strategies and short-term

plans. Alternatively, the ‘formal’ style of scenario building developed by Khan’s colleagues

from the Rand Corporation is based on quantitative methodology underlining the

importance of computer technologies, models and processes for analysis and calculations of

future paths. In the 1980s, Battelle further developed formal methodology by combining it

with a software program and illustrated the importance of managerial judgment for

computer-based scenario simulations (Verity 2003; O'Brien, Meadows 2013).

3.2 Scenario as a planning tool

A scenario is a general and comprehensive description of a possible paths in the future, that

are based on a complex network of influencing factors and plausible assumptions starting at

the present point of time that are supported with comprehensive reasons (Figure 2)

(Zukunftsorientierte Unternehmensgestaltung 2014). Scenarios represent complex

interdependence of qualitative elements of a topic and illustrate possible alternative

developments in the future (Geschka et al. 1993).

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Figure 2. The path of a scenario (Zukunftsorientierte Unternehmensgestaltung 2014, pp. 49)

Scenarios can be developed on macro level for country or regions focusing on the major

global, external and environmental trends for long-term planning. The company level

analysis designed for narrower short-term oriented scenarios additionally include

parameters such as internal issues, industry structure models or market demand. Both

scenario levels often complement each other because broad global research represented by

economic, social and political variables can be supported with investigations of a precisely

defined issue, industry or topic (Verity 2003).

The exploitation of scenarios in strategic management is defined as scenario management,

which main objective is to identify opportunities, potential success factors and threats in

order to support strategic decision-making (Zukunftsorientierte Unternehmensgestaltung

2014). According to Schoemaker, companies can significantly benefit from this technique,

if they operate in highly uncertain and volatile environment and in addition they do not

create new business opportunities, which is accompanied with mediocre quality of strategic

thinking (Schoemaker 1995). In order to remain competitive in the long-run and to build

robust strategies, companies should consider the high complexity of social, economic,

political and technological changes, as well as and developments in their environment more

than ever before (Geschka, Schwarz-Geschka 2012).

Initially, the scenario building technique was developed for strategic planning, however,

companies apply this method to operational planning, budgeting and forecasting processes

in order to estimate impact of assumptions that can shape the future (Axon 2011). The main

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argument for companies to apply the scenario planning tool is the advanced learning

potential obtained by going through the main stages of the process while defining the

research question, collecting and gathering data and generating the final model. The

technique provides broader understanding of the major trends, forces and uncertainties

influencing the future development of the company that can become a key pillar for the

strategic management. On the other hand, this method has not gained popularity due to

large amount of employed resources and high requirements to the quality of scenario team

that as a rule meets on a regular basis conducting workshops, research activity and

interviews (Verity 2003).

3.3 The scenario building technique

The scenario building technic is an effective multi-step approach for long-term planning in

the highly uncertain and unpredictable environment. The scenario software INKA 4

represents the integrated algorithm for scenario planning developed by Geschka & Partner.

The program systematically supports scenario creation for a chosen topic using description

of influencing factors to evaluation of scenarios based on alternative assumptions of the

descriptors (Schwarz-Geschka 2017).

Figure 3: Eight steps of the scenario planning technique (Geschka, Schwarz-Geschka 2012, pp. 7).

The scenario planning technique comprises of eight major steps (Figure 3). The first stage

implies precise definition of scope of analysis and time frame which as a rule depends on

Step 1 •  Structuring and defining the

topic

Step 2 •  Identifying and structuring

areas of influence

Step 3

•  Formulation of descriptors and development of assumptions

Step 4 •  Formation and selection of

alternative assumptions

Step 5

•  Development and interpretation of selected impact scenarios

Step 6

•  Introduction and impact analysis of unexpected disruptive events

Step 7

•  Writing the topic scenarios resp. deducting consequences for the task

Step 8 •  Conceptualising of

measurements and plans

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factors such as technological changes, competition, product life cycle, state elections, etc.

(Schoemaker 1995). The second step includes identification, collection and structuring of

influencing factors, the number of which will determine the complexity of the future, that

are to be classified into areas of influence that are related to the chosen topic. After

scrupulous revision and elimination of overlapping factors, they are clustered into areas of

influence. In the next step selected influence factors are formulated as quantitative or

descriptive parameters, so called descriptors that cover both quantifiable trends and

qualitative developments creating the projections for the target scenario year. Further, the

computer software algorithm combines them into one consistency matrix, which makes it

possible to compare and estimate which of alternative descriptors are reinforcing, neutral or

contradictory to each other. After the consistency matrix is complete, the program conducts

analysis by combining highly consistent assumptions and develops alternative scenarios. In

the fifth step, from two to four scenarios are to be selected basing on the criteria such as

‘high consistency’ and ‘significant difference’ (Geschka, Schwarz-Geschka 2012).

According to scenario building technique on the later stages the impact of disruptive

negative events (earthquakes, explosions), as well as positive events (technological

inventions, political reconciliations) that change the direction of trends can be introduced,

analysed and monitored though development of new scenario variances. Ultimately,

obtained results enable to determine and design the necessary measurements and long-term

strategies (Geschka et al. 1993).

4. Team methodology and process

Differing from the previous versions of the software used for the scenario planning, INKA;

INKA 4 is the first Web-based version that has been released. This improvement allowed

the team process to use the program from different computers without having it installed; it

also gave greater flexibility and the possibility of a faster process.

The scenario-planning project in industry 4.0 is done in the context of SMEs due to the

importance that they have in the German economy, as it is mentioned above, and the way

they will be affected by this 4th industrial revolution. There are diverse positions regarding

the way Industry 4.0 will affect companies in Germany, especially SMEs. It is argued that

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the 4th industrial revolution will create plenty of opportunities for German SMEs. On the

other hand, it represents a special challenge for SMEs in Germany (Sommer, 2015).

As it is mentioned above, Industry 4.0 is a term that is relatively new in Germany and has

been heavily promoted by diverse entities, especially The Economic Affairs Industry

together with the Research Ministry through the “Plattform Industrie 4.0”. An special focus

on SMEs is implemented through the program “Mittelstand 4.0” (“ Future of the German

Mittelstand ” Action Programme, 2016). Therefore, the development of this Industrial

Revolution is still in progress and the next 15 years will be critical for either the successful

or failed implementation. For this reason, the scenario-planning project in Industry 4.0 is

forecasted by the year 2030.

Extensive literature review was done in order to obtain a general view of what different

authors, as well as different governmental and private entities expect from the 4th industrial

revolution, specifically in Germany. After having detected the most prominent factors that

are forecasted as key elements for the implementation of the 4th industrial revolution, the

following areas of influence were selected: Politics, Finance, Infrastructure, Technology &

Innovation, Education & Qualification and Integration.

4.1. Infrastructure

There is a widespread consensus that success in the Industry 4.0 age will depend on the

quality and reach of infrastructure. Particular attention is paid to digital infrastructure like

communication networks (Heng 2014). Digitalization is invading more areas of our lives so

that there is more reliance on data just as we generate larger amounts of it. It is clear that

any network must be built with the capacity to manage the continuously increasing volume

of data and quality requirements (Heng 2014). The OECD urges members to create

sustainable national strategy for investing in digital infrastructures to serve the present

needs but also meet the demand in the future (OECD 1/12/2017). Germany with a 2 Mbit

per second transfer rate broadband connection and 1 percent fibre optic coverage is lagging

behind (Graumann, Bertschek 2014). Intercompany internet based production and

associated downstream services like evaluating data in real time as in a closed production

feedback loop requires a much higher transmission rate that 2Mbit per second (Heng 2014).

Perhaps realizing the gap, Germany is modeling the OECD recommended strategy and

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pioneering a number of its own initiatives to increase investment in infrastructure through

public and private funding. The government understands that there are stark differences in

not only the way ICT is used but also on the first level of making the decision to adopt new

technologies between SMEs and large firms where the latter are beset by multiple

obstacles. These range from financial constraints to a lack of complementary resources like

correctly skilled labor (OECD 1/12/2017).

4.2. Technology and Innovation

Germany’s Mittelstand has the reputation of being both innovative and competitive on a

global level. Germany boosts the largest share of hidden champions, SMEs with low public

visibility, typically family owned and leading an industry or in second place globally.

German SMEs typically specialize and bring to bear a very high level of expertise in their

field. The country also has substantial technical knowhow with regard to numerous

Industry 4.0 technologies and a well educated / trained workforce (Schröder 2016). The

vision of fully digitized and networked production has created the impetus to search for

both technologically and socially innovative solutions. Product end users and producers are

increasingly collaborating digitally. The resultant innovations are driving further

digitalization and enabling new business models that threaten the traditionally successful

models from the start of the information age (Buhr 2015). Germany is already in strong a

technological position. According the European Patent Office, Germany holds 16% of all

new patents in 2016 and is second only to the United States of America ((European Patent

Office, 2016). The swift level of innovative breakthroughs enables the development of new

products just as the old ones get improved so that business and production processes are

continuously improved. In this way Germany keeps up with technological megatrends like

smart data, Internet of things and 3D printing (Graumann, Bertschek 2014).

4.3. Finance

Adoption of Industry 4.0 technologies require significant investment outflow to cover

modernization of production facilities, replacement of the old systems to modern software,

installment of the hardware, development of IT infrastructure etc. what often representing a

20

challenge for SMEs. Thus, the availability of financial resources is one of the main

prerequisites for successful digital transformation („Erschließen der Potenziale der

Anwendung von ,Industrie 4.0‘ im Mittelstand“ Juni 2015; “Future of the German

Mittelstand” Action Programme May 2016).

The key external source of finance remains to be bank loans to which SMEs have

historically good access due to improved creditworthiness, higher profitability and

increased equity ratios. Despite favorable borrowing terms and low interest rates, according

to KfW in past three years four out of five SMEs carried out investments in digital projects,

with half investing less than EUR 10 000 per year (KfW SME Panel 2016 2016).

On the other hand, young innovative SMEs and micro-businesses tend to have insufficient

cashflow what make them more dependent from external financial resources, However, due

to lack of creditworthiness that indicates the ability to meet credit obligations, they have

limited access to bank loans. The occurred financing gap can be compensated by venture

capital, although, in this area Germany is still behind other developed countries (Schröder

2016; “Future of the German Mittelstand” Action Programme May 2016). In order to

strengthen this sector of capital market and encourage business angels to invest in dynamic

innovative enterprises the German government has provided in total €2 billion,

implemented new legislative initiatives (§8 Körperschaftssteuergesetz KSTG – German

Corporation Tax Act) and launched public-private incentives such as “INVEST venture

capital grant”, High-Tech Start-Up Fund and ERP Venture Capital Fund Investments

(“Future of the German Mittelstand” Action Programme May 2016; Schröder 2016;

Bundesministerium für Wirtschaft und Energie (BMWi) 2016, 2017).

4.4. Politics (national program, security, legislation)

The German government developed Industry 4.0 as a part of the High-Tech Strategy 2020

Action Plan to secure leading competitive position of German enterprises through

combination of research and innovation initiatives (Federal Ministry of Education and

Research 2014). The Federal Government support SMEs through special funding programs

in the area of research and innovation, promotion of digital technologies, infrastructure, as

well as specialized funding activities and projects, such as "KMU-innovativ: Informations-

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und Kommunikationstechnologie (IKT)", Zentrale Innovationsprogramm Mittelstand

(ZIM), and „KMU-innovativ“. Additionally, four "Mittelstand 4.0-Agencies" and ten

regionally active "Mittelstand 4.0 competence centers" were established to inform about

perspectives of digitalization and support the development of practical Industry 4.0

solutions across different regions („Erschließen der Potenziale der Anwendung von

,Industrie 4.0‘ im Mittelstand“ Juni 2015).

The goal of Industry 4.0 is to increase benefits of enterprises through information and

communication technologies and cyber-physical systems, thus, creating demand for

standardization. Furthermore, development of Industry 4.0 technologies due to increasing

data generation, storage and procedure arises new legal challenges regarding general data

protection regulation, development of IP law and IT security (Plöger, et al. 2015). The risk

associated with date exchange across the integrated value chain make SMEs and their

customers an attractive target for cyber-attacks what represents a threat not only for

production processes but also for national economy (Heng 2014; Plöger, et al. 2015;

„Erschließen der Potenziale der Anwendung von ,Industrie 4.0‘ im Mittelstand“ Juni 2015).

4.5. Education & Qualification

The 4th industrial Revolution in Germany demands changes in the nature of work and also

in the qualification of employees. The transformation of production processes requires new

types of interaction between people and machines, which will cause the need of available

qualified workforce (Lorenz, Rüßmann, Strack, Lueth, & Bolle, 2015).

Education and Qualification represents an area that is fundamental for the development of

Industry 4.0 in SMEs in Germany. The availability of qualified workforce and the

expansion of the technological aspect of education towards these transformations will

enable employees to cope with more complex processes expected in the workplace.

(Hecklau, Galeitzke, Flachs, & Kohl, 2016). On the other hand, in the workplace it is

manifested as fear that increasing automation will escalate job loss (Schröder 2016).

Industry 4.0 has promised a great deal of change and this naturally comes with uncertainty

(Deutsch Bank, 2014). Furthermore, it is predicted according to Constance Kurz, adviser of

Industry 4.0 at I.G. Metall, “approximately 65% of employees in Germany are capable to

22

upgrade their skills to new requirements” (Lorenz et al., 2015). Therefore, in order to meet

the present and future challenges that Industry 4.0 carries, it is critical to consider the

activities that are related to professional education, learning and trainings (Hecklau et al.,

2016).

4.6. Integration

One of the most important and indispensables requirements for adopting Industry 4.0 are a

closer integration within companies and also a networked value chain (Kagermann et al.

2013). At the same time, there is an increased pressure for product efficiency and highly

connected manufacturing processes (“Future of the German Mittelstand ” Mittelstand ”

Action Programme, 2016).

It is expected that industry 4.0 will change the way business is done, which will result in

new ways value creation as well as new business models (Kagermann et al. 2013). On the

other hand, the interaction between SMEs and with research establishments will be highly

important and determinant for the speed of adoption of these transformations (“ Future of

the German Mittelstand ” Mittelstand ” Action Programme, 2016).

The areas of influence selected have the aim to group a set of descriptors, which will be as

“descriptive parameters” (Schwarz-geschka & Introduction, 2014; ). Each descriptor will

belong to an area of influence and will have the purpose to project future trends or

alternative developments that are very probable to happen according to the literature

reviewed. The projections selected to every descriptor can be up to 3 and are called

assumptions. The total of assumptions or alternatives derived from each descriptor had

assigned a probability of occurrence, according to what it is projected in the current

literature available. Per descriptor, the alternatives had to sum a total of 100%.

In the first round of descriptors created, a total of 27 descriptors were developed. It was

critical to take into consideration, the fact that the descriptors were not overlapping and that

the best possible factors or key elements per area were included.

After all descriptors were finished and evaluated, the final set of descriptors that were

selected to use in the program were 24 descriptors in all areas together. In order to create

the scenarios, it is necessary to fill the consistency matrix, Figure 4, where all descriptors

23

are evaluated against another descriptor. Each relationship must have a value of assessment.

The value range goes from 3 to -3, as it is presented in the Table 1.

The assessment of the consistency matrix is based in the assumption that how related is

each situation or how likely is to happen at the same time. This step in the process is critical

for the scenario creation. The quality and precision of the assessment will determine the

consistency of the future scenarios.

Figure 4: Example of Consistency Matrix and assignment of values.

Values Interpretation

3 Mutuallydependent

2 Mutuallysupportive

1 Fittingintothesamecategory

0 Unrelated

-1 Fittingadversely

-2 Contradictory

-3 Mutuallyexclusive

Table 1: Values and interpretations for Consistency Matrix.

The estimation of values given in the consistency matrix is based on the judgment

supported with the literature research done previously.

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After the evaluation of the consistency of matrix, the program was run. As a result, 5 final

scenarios were obtained (Figure 5). Each scenario has a sum of consistency, which

indicates the quality of the scenario created and it is the critical element to select the final 4

scenarios. Each scenario has a set up descriptors. According to the quality of these

descriptors and the number of used ones by the software, was the sum of consistency. At

last, the scenarios are ranked according to this sum of consistency. The scenario ranked in

1st place is considered ad the most conclusive one. The description of the final 4 scenarios

is presented below.

Figure 5: Consistency Sum after running the program INKA 4.

5. RESULTS

5.1 Scenario S-5 (Rank 1) – Watch out! The future is coming!

The German government has achieved the strategic goal targeted on the digitization of the

economy creating the most preferable conditions for businesses what leads to global

leadership of German industries and advanced economic growth. It actively shapes the

operating field for SMEs through development of a holistic initiative that bundles all

existing before Industry 4.0 programs. The especial emphasis is made on the spread of

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competence centres and specialized agencies that support SMEs on their way towards

digitization by providing comprehensive consultation on Industry 4.0 technologies.

Government engage SMEs into digitalization processes through construction of a national

gigabit optical fibre network with speeds upward of 50Mb and collaboration with private

sector on development of internet infrastructure. Additionally, completed Machinery

Directive of the EU, "machine-to-machine" (M2M) standards and directives on protection

of trade secrets enabled SMEs to operate in safe and secured environment exchanging large

amount of data throughout the whole value chain without a threat of cyber-attacks.

The optimistic approach toward risk and availability of external funds encouraged SMEs to

implement Industry 4.0 technologies with high capital requirements. The main sources of

debt capital are KfW entrepreneurial credit that covers costs of technologies that cannot be

capitalized as non-current assets and ERP innovation program targeted on conduction of

near-market research and development. Moreover, investments coming from the strong

venture capital market enable innovative SME’s to utilize business opportunities provided

by digitization through sharing high average risks of Industry 4.0 projects.

Due to the full vertical integration within the company, the inter-company horizontal

networks and transformation of business model SMEs are able to produce customized

products in small amount for a specific market meeting the last-minute requirements from

customers. The integrated value chain leads to increased collaboration between SMEs,

cooperation for open innovations, eventually, gains from resource productivity and

efficiency.

Industry 4.0 technologies have changed the core business processes providing virtual real-

time image of the company. The automated recording, evaluation and processing of

machine, plant and product data enable real-time planning and controlling of production, as

well as identification of employees, materials, tools and equipment in a decentralized way,

closing the gap in processes where they are currently needed and reducing the financial

expenses of rework. Self-organized and self-optimized systems automatically evaluate and

store the data, interact with each other ensuring the SMEs that the customer receives a high-

quality product.

In terms of labor force, despite the fact that automatization overcomes the talent shortage

due to adoption of CPS technologies and assistance systems, SMEs require workers with

26

both technical and social skills to cope with Industry 4.0 challenges. In order to develop

necessary skills, SMEs located in the same region cooperate on projects and organize clubs

where companies transfer employees to learn from other companies’ employees.

Furthermore, the implementation of Industry 4.0 at SMEs shapes the working conditions

for their employees providing more personal flexibility regarding work time, content and

place. Encouraged by the opportunities for self-development they actively adapt to

disruptive changes caused by innovative technologies and business models.

5.2 Scenario S-2 (Rank 2) - Digital Darwinism

There are diverse and contradictory reactions of German SMEs regarding the full adoption

of the new disruptive technologies of Industry 4.0. Even though the conditions for the

successful implementation of Industry 4.0 technologies are favorable, some SMEs with

high bureaucratic processes and high aversion towards change are less engaged in the

process towards full digitalization. Their skepticism prevails, even though the young

employees approach changes positively and believe in the cause. These SMEs become part

of the process slowly; prefer to observe how the market reacts and be sure if the required

investment is worthy.

Despite the attractive panorama for ventures capital investments and loan acquisitions,

many SMEs struggle to trust in long-term financial obligations and see many

disadvantages, which makes in their eyes, the implementation of Industry 4.0 a possible

failure in the future. This represents a barrier for the full adoption and harmonization of

Industry 4.0 among all SMEs in Germany. The establishment of successful cooperation

between companies for employee development and innovation becomes difficult.

On the other hand, some SMEs, specifically start-ups and companies managed by young

managers and CEOs, are the ones who are more motivated towards the implementation of

the necessary upgrades and investments to fully adopt Industry 4.0. They identify the

benefits that it carries for the company’s long-term competitiveness. Furthermore, their

production and logistics take a bigger step towards a full digitization of their processes as a

direct consequence of a fully horizontal and vertical integration. Planning and control of

production improves, allowing companies to better monitor quality parameters and meet

last minute requirements profitably. They put more emphasis in the services and customer

27

post-purchase since they are now competing with large companies that at the same time are

capable to deliver one-batch products. The key element to take into consideration for

German SMEs in order to remain competitive is the quality of the customer services

provided.

Although the German Government promotes the benefits and legal protection for adopting

these disruptive transformations through the diverse platforms and the Initiative Industry

4.0 within SMEs, only some SMEs take part of the 4th industrial revolution. This makes it

difficult to establish successful cooperation between companies for employee development

and for the implementation of open innovation.

While the agile SMEs engage in the digitization process at a faster pace and trust in the

promotion of Government to invest along with them in the necessary infrastructure, the

skeptical SMEs that do not adopt Industry 4.0 technologies in the first place, start to lose

competitiveness with the risk of being out of an always changing market.

5.3 Scenario S-4 (Rang 3) - The missing link

In recognition of the critical role SMEs play in the German economy, the government

provides support in Industry 4.0 related fields. Sufficient resources are made available to

support varied needs of SMEs that decide to embark on digitalization. Even on matters of

regulation, there is strong commitment from the Government to create a complimentary

legal framework for industry 4.0 technologies. Public partnerships with the private sector

are successful in stimulating investment in infrastructure so that the high-speed Internet

backbone of the country is well developed to reach rural areas where SMEs are

predominantly located and the general public can enjoy ubiquitous Internet.

The potential to combine connectivity and automation to allow more employee autonomy

and flexibility in the workplace is mature. The improved connectivity can support

automated data collection and processing to power machine self-organization. SMEs have

the proven ability to adapt new technologies like full vertical integration, which in turn

facilitate horizontal integration into global value chains. The benefits of which are

profitable customized production, resource and energy efficiency.

With a positive external environment consisting of mature industry 4.0 technologies, good

connectivity and commitment to legal reforms, venture capital is attracted to industry 4.0

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financing to compliment public finance initiatives. This not only makes more funds

available but eases access to them for SMEs. The pressures of a shrinking workforce make

the case for automation very clearly and SMEs adopting CPS in the production process

would be compelled to pursue a skills development strategy that balances technical with

social skills to match the changes in work configuration.

Staying true to tradition, SMEs do not take advantage of the available external resources

preferring internal funds. Investment activity in new technology contracts as leaders grow

older and prioritize capital accumulation over investment in new longer term and medium

term projects. SMEs pursue narrow innovation agendas exclusively by collaborating with

resource rich large firms. The entire eco-system is ready to support SME transformation

into digital enterprises but they are not ready. The vision of a mature Industry 4.0 hangs in

the balance.

5.4 Scenario S-1 (Rang 5) - Verging on Extinction

SMEs retain a traditional aversion to risk and reliance on internal resources, which severely

restricts investment into new technology. The closed traditional approach to innovation

undermines collaboration through SME clusters resulting in a chronic dependence on

public institutions like Max Planck and Fraunhofer Institute to sustain innovation. With a

reduced internal capacity for innovation, SMEs lose their ability to adapt new technology

and are consequently not only left out of the industry 4.0 revolution but also threatened by

digitalization.

Due to limited investment in infrastructure, transition to CPS is very slow and SMEs

remain in mass production segments. There is very little automation in the production

system and they still use individual barcode systems, which hamper information flow and

lock SMEs outside global value chains. Production is inefficient and based on traditional

business models.

The early government efforts to stimulate private investment in infrastructure in the

telecom industry result in the emergence of industry monopolies. These monopolies focus

on the economically viable projects in which connectivity needs for SMEs primarily

located in rural areas are not met. Consequently SMEs have no access to modern fibre optic

cables but instead have to contend with limited and slow Internet. The government is not

29

able to rally private investment in infrastructure and subsequently shifts to a balanced

sustainable development strategy that diminishes the focus and support for SMEs industry

4.0 initiatives.

There is a leadership vacuum created by government shifting its focus away from industry

4.0, which precipitates a climate of distrust among industry 4.0 stakeholders and curtails the

development of Industry 4.0 compatible legal reforms. The combination of a new

government agenda that does not prioritize industry 4.0 implementation and an ambiguous

legal environment diminishes the will of venture capitalists to extend funding for new

technology in SMEs so that large enterprises thrive at the expense a modern Mittelstand.

Faced with a lack of access to external funding, SMEs consolidate in house talent

development efforts with a focus on integrated engineering skills most suited to present

business needs. Most employees are also opposed to change because industry 4.0

advancements are perceived as ceding their autonomy. So rather than embarking on

automation SMEs relive the pressure of a declining workforce in Germany by recruiting

from the large pool of refugees. Under resourced, held back by inadequate infrastructure

and internally resistant to change, the age of the traditional successful change and

technologically savvy German SME is at an end.

6. Discussion of Results

The final four scenarios selected portray the different possibilities in which the 4th industrial

revolution could affect SMEs in Germany by the year 2030. The scenarios differ from each

other in the degree of transformation that SMEs go through and the conditions under which

Industry 4.0 develops. The main differences are identified in the degree of government

support, attitude of SMEs towards investments and external resources, readiness to change,

employee development and financial conditions. The first scenario illustrates the ideal

successful implementation of Industry 4.0 technologies under the best financial and

governmental panorama. It is showed the transformation that SMEs suffer due to its full

adoption and the benefits obtained from it. In the second and third scenarios describe the

different barriers, which can prevent SMEs from adopting Industry 4.0 and therefore

loosing competitiveness. The last scenario exposes how SMEs do not take over Industry 4.0

technologies and the consequences that it carries regarding SMEs competitiveness.

30

Although there is still high uncertainty regarding the successful implementation of industry

4.0 among German SMEs, the presented results picture the spectrum of possible predictions

based on facts and updated information. Therefore, the outcome stands on valid

estimations.

7. Conclusion

The new industrial revolution is expected to be an evolutionary journey. On the other hand,

it brings indeed uncertainty of how organizations will be able to cope with the increased

complexity of production processes that it carries. Therefore, the course of the

transformation towards the full adoption of Industry 4.0 is something that is not

predetermined yet (Kagermann et al. 2013).

In order to identify the possible directions that the current trends and conditions could take

in the nearest future, the scenario planning technique was employed. Those predictions

illustrate all possibilities of development and effect that the 4th industrial revolution can

have on SMEs in Germany. Furthermore, the results are conformed of all areas that SMEs

could be affected.

Even though the report’s outcome presents different possible scenarios that could be

developed by the year 2030, they should not be taken as exact and unique predictions.

There are several factors that should be taken into consideration such as possible disruptive

changes in the nearest future, efforts of governmental and private entities, among others.

The descriptors and specifications were selected based on the judgment generated from the

current literature available and trends. Since the topic is relatively new, the information

available is limited and still under research. Final scenarios are the result of those

descriptors and specifications.

At last, there are different opinions regarding the disruptive changes that industry 4.0

entails. The shift towards this transformation is a long-term project; nevertheless it is

fundamental that companies are aware of upcoming changes and start creating strategies

from an early stage (Kagermann et al. 2013).

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8. Annex

8.1 List of final descriptors

Descriptor name: Innovation

Area of influence: Technology & Innovation

Current situation: Large companies dominate Research and development for innovation.

SMEs spend significantly less resources on innovation and R&D for that matter. There is a

clear trend of declining innovation among German SMEs, where innovation is mainly self-

funded and traditionally done in-house. The industry 4.0 transformation represents one of

the main factors for increasing innovativeness of other regions, rapid technological

changes, rising demand for novel products and services, falling transaction costs and

shorter product life cycles driven by digitization.

Specification A

- Name: SMEs pursue open innovation

- Description: The rapid growth in connectivity and social media allows SMEs to

make innovation truly social. They also implement open innovation with other

entities and take advantage of online crowd funding platforms to scale innovation

by rising funds for research.

- Reason: Open Innovation does not require large capital investments. SMEs

traditionally don't spend in R&D.

- Probability: 30%

Specification B

- Name: SMEs innovate by collaborating with large firms

- Description: SMEs partner with large companies on innovation projects. Part of the

effect of the Industry 4.0 transformation is that large companies shift the focus of

their innovation investments towards riskier initiatives and breakthrough or

disruptive innovations which are traditionally associated with SMEs operating in

niche markets focused on clear but singular market opportunities.

32

- Reason: The size, resources and experience of large and established firms endow

important advantages to SMEs for innovation.

- Probability: 20%

Specification C

- Name: Reliance on public institutions for innovation

- Description: Innovation attracts more funding from government to support the

declining trend in SMEs. SMEs increasingly depend on funds/initiatives and

government institutions like Universities, Fraunhofer Institute, and Platform

industry 4.0 to sustain and fund innovation research.

- Reason: Germany has a robust national innovation system which is also well

funded by the government.

- Probability: 50%

References:

• Potter, Jonathan; Lunati , Mariarosa; Marchese, Marco Marchese; Martinez-

Fernandez, Cristina; Noya ,Antonella Noya (2010): SMEs, Entrepreneurship and

Innovation. Available online at http://bit.ly/2sU45Mv

• Abel-Koch, Jennifer; Del Bufalo, Gino; Fernandez, Miguel; Gerstenberger,

Juliane; Lo, Vivien; Navarro, Blanca; Thornary, Baptiste(2015): SME Investment

and Innovation France, Germany, Italy and Spain Available online at

http://bit.ly/21J0SGh

• Davis, Nicholas; Planjyan, Lilia; Pozza, Serena (2015): Collaborative Innovation,

Transforming Business, Driving Growth. Available online at

http://www3.weforum.org/docs/WEF_Collaborative_Innovation_report_2015.pdf

Descriptor name: Technological Adaptability


Current situation: Many German SMEs already operate as high-specialized companies

with a large aptitude for innovation. They have an excellent reputation for creativity,

quality consciousness and technology-orientation. This provides a great position from

33

which to make the required changes for the industry 4.0 transformations. Studies by

Fraunhofer Institute and Hermann Simon on SMEs also indicate that German SMEs have a

certain technological savvy that has enabled them to adapt and thrive in the face of previous

technology disruptions.

Specification A

- Name: Gradual adaptation of industry 4.0 transformations

- Description: Industry 4.0 transformation requires less equipment replacement than

previous transformations and German SMEs make the necessary upgrades. German

SMEs become more agile as a result of their innate ability to adopt new

technologies. They successfully integrate disruptive industry 4.0 technologies and

thrive.

- Reason: Existing dynamic capability to manage technological changes, short

hierarchies facilitating flexible decision making and strong government support

network for innovation, employee training and investment in new technology.

- Probability: 40%

Specification B

- Name: Failure in the adaptation of Industry 4.0

- Description: New technologies disrupt markets immediately with the negative

effect that markets change faster than investment cycles. Less capitalized SMEs

with small specialized workforces are not able to keep up with the pace and impact

of the technology changes.

- Reason: Characteristics like highly specialized labor force and high asset specificity

serve to lock SMEs into old markets and constrain technological versatility required

to take the industry 4.0 transformations in stride.

- Probability: 60%

References

• Wee, Dominik; Kelly, Richard; Cattell, Jamie; Breunig, Matthias (2015): Industry

4.0 How to navigate digitization of the manufacturing sector. Available online at

https://www.mckinsey.de/files/mck_industry_40_report.pdf

34

• GiZ (2012): The German Mittelstand – an Overview. Available online at

http://www.dcmsme.gov.in/Policies/International%20Policies/The%20German%20

Mittelstand_An%20Overview.pdf

Descriptor name: Investment in technology


Current situation: In 2015, investments remained stagnant because micro-businesses

exercised restraint. In 2016 SMEs increased slightly their expenditure in new machinery,

equipment and buildings by 3 billion EUR or 1.9% to 161 billion EUR. Despite the

increase and good financial environment, SMEs keep investments in new technology

stagnant according to the KfW SME panel survey, 2016.

Specification A

- Name: SMEs invest in industry 4.0 technologies

- Description: There are good conditions for the acquisitions of loans and/or

subsidies. SMEs face troubles in the decreasing workforce productivity and invest

in new technology with the expectations of productivity leaps. Industry 4.0

technologies help SMEs to raise productivity.

- Reason: There is a positive growth expectation for the future and the share of

SMEs with a positive outlook on both turnover and returns rises.

- Probability: 30%

Specification B

- Name: SME investment activity contracts.

- Description: In the short term, Industry 4.0 provides little additional benefits to

justify more investment. Early adopters do not experience the gains in productivity

hoped for. The promotion of the industry 4.0 transformations evaporates leaving

behind pessimism and more restraint around investment into new technology.

- Reason: The willingness of SMEs to initiate investment projects has stagnated in

the past. On average, most of the investment volume of SMEs is sourced from their

own funds and Industry 4.0 technology is very expensive.

35

- Probability: 70%

References

• Abel-Koch, Jennifer; Del Bufalo, Gino; Fernandez, Miguel; Gerstenberger,

Juliane; Lo, Vivien; Navarro, Blanca; Thornary, Baptiste(2015): SME Investment

and Innovation France, Germany, Italy and Spain Available online at

http://bit.ly/21J0SGh

• KfW SME Panel (2016): SMEs are using their financial buffers – but not boosting

investment. Available online https://www.kfw.de/PDF/Download-

Center/Konzernthemen/Research/PDF-Dokumente-KfW-Mittelstandspanel/PDF-

Dateien-Mittelstandspanel-(EN)/KfW-SME-Panel-2016_EN.pdf

Descriptor name: Data collection and processing


Current situation: Knowledge, information and data are key factors in industry 4.0 and

therefore are highly relevant for SMEs’ success. Currently in this area, there is an urgent

need for the structure of data in SMEs. Due to missing, inaccurate or outdated data sets,

optimization approaches often fail.

Specification A

- Name: Automation of information flow

- Description: In production as well as in logistics, a virtual real-time image of the

company processes is generated by the automated recording, evaluation and

processing of machine, plant and product data (e.g. by the use of sensors), which

enables real-time planning and control of production. The process data for capacity

and resource planning are fully generated without additional manual effort and

consequently minimizing large expenses for rework. In addition, systematic

monitoring of the process parameters assures the company that the customer

receives a high-quality product without the installation of a final inspection.

- Reason: Due to the continuous increase in the performance of sensors and

simultaneous price declines, a large number of information can be collected in all

36

areas of production and logistics. As a result, the generated data can be better

analyzed and communicated besides being correlated with an increase in customer

satisfaction.

- Probability: 50%

Specification B

- Name: Individual barcode systems

- Description: Barcode systems enable easy identification of products on machines

and systems. Furthermore, data is collected and processed within the company:

from development to production and storage phase. However, the generated data

must be additionally evaluated and communicated to other companies since it is not

flowing through the entire value chain automatically.

- Reason: In-house the data of a company can be better managed by appropriate

regulations and rules of procedure or by separate operating agreements. Moreover,

personal penalties are often provided for data breaches.

- Probability: 65%

References

• Erschließen der Potenziale der Anwendung von Industrie 4.0‘ im Mittelstand“ (Juni

2015). Studie im Auftrag des Bundesministeriums für Wirtschaft und Energie

(BMWi). Available online at

http://www.zenit.de/fileadmin/Downloads/Studie_im_Auftrag_des_BMWi_Industri

e_4.0_2015_agiplan_fraunhofer_iml_zenit_Langfassung.pdf, checked on

4/10/2017.

Descriptor name: Degree of machines’ autonomy


Current situation: The functional area of self-organization and autonomy of machines is

one of the central elements of Industry 4.0, in which production is conducted through

autonomous communication of machines. In some applications control circuits, quality

control, material supply and production control with intelligent and self-organizing objects

37

are already being used. However, the functional area of autonomy still has a low level of

implementation.

Specification A

- Name: Autonomous self-organized machines

- Description: Self-organization, self-configuration and self-optimization of systems

are achieved through technologies that automatically evaluate the data. Self-

organization is thus an important part of the cyber-physical systems, which not only

collect but also evaluate and store data. Additionally systems communicate with one

another, have an identity and interact with their environment. Employees, materials,

tools and auxiliary equipment are planned and used in a decentralized way, exactly

where they are currently needed.

- Reason: An autonomous, self-organizing and flexible capacity planning leads to an

improved adaptation of the resources to the current situation. The digital connection

of the individual systems leads to a flexible response to unplanned events, such as a

system fault. In case of fault, the system reports it and asks the service personnel,

orders material to repair and provides the instruction for troubleshooting. Further

potential in the field of self-organization is in the reduction of energy consumption.

Machines and systems are supplied with electricity, water, compressed air, etc., only

when it is necessary.

- Probability: 35%

Specification B

- Name: Human control of machines

- Description: An essential question in the introduction of autonomous and self-

organizing systems is how operational safety can be guaranteed. The human-

machine interface is still highly critical and is far from its final maturity. The

technical development of autonomous production systems and logistical equipment

does not yet allow safe and parallel cooperation with personnel.

- Reason: The acquisition of full autonomous machines is associated with a

considerable investment volume and high follow-up costs for maintenance in order

to guarantee safe human-machine interaction. Thus, the low availability of such

38

systems, due to their complexity, further reduces the profitability for SMEs to

obtain them and therefore, human control is still needed.

- Probability: 65%

References






4/10/2017.

INFRASTRUCTURE

Descriptor name: Digitalization

Area of influence: Infrastructure

Current situation: Today, every company in every sector is affected by digitalization and

in Germany about 1 million people are already employed in the digital economy. This is

creating a demand for more robust connectivity infrastructure. Even though 88% of all

companies understand the connection between digitalization and commercial success, only

51% of the SMEs say that digitalization is not yet part of their business strategy.

Specification A

- Name: SMEs transform into digital enterprises

- Description: As a result of the industry 4.0 transformations there is an Internet of

things, services and most importantly a mature industrial Internet. SMEs actively

engage in the digitalization process and strengthen their market positions while also

capture new markets by investing in digital infrastructure.

- Reason: There is an attractive support from government through the Digital

Investment programme for SMEs (Digitales Investitionsprogramm Mittelstand)

with a volume of €1 billion.

- Probability: 40%

39

Specification B

- Name: Digitalization threatens SMEs

- Description: Large companies invest heavily in digital infrastructure and threaten

the existence of SMEs as they own more infrastructure required to compete in the

digital economy. Increased digitalization by large companies increases their market

share leaving the financially constrained SMEs out of competition.

- Reason: As digitalization becomes fundamental for a company’s survival,

competitive advantage is derived from quantity and quality of digital resources like

data. This leads to a scope of infrastructure so that investment creates a distinct

advantage for large companies.

- Probability: 60%

References

• Federal Ministry of Economic Affairs and Energy (2016): Digital Strategy 2025.

Available online at

http://www.de.digital/DIGITAL/Redaktion/EN/Publikation/digital-strategy-

2025.pdf?__blob=publicationFile&v=8

• OECD (2017): Key issues for digital transformation in the G20. Available online at

https://www.oecd.org/g20/key-issues-for-digital-transformation-in-the-g20.pdf

• Wee, Dominik; Kelly, Richard; Cattell, Jamie; Breunig, Matthias (2015): Industry

4.0 How to navigate digitization of the manufacturing sector. Available online at

https://www.mckinsey.de/files/mck_industry_40_report.pdf

Descriptor name: High-speed Internet


Current situation: Industry 4.0 technologies demand the availability of broadband Internet

access. This is expected to result in an increase in the volume of data to be transferred over

the Internet compared to today. Today, only 7% of households have access to optical fiber

cable and Germany has the lowest fiber-optic coverage in all of Europe, with just 1 %.

40

Affordable gigabit connections for SMEs are in most cases not available especially as many

of them are located in non-urban areas.

Specification A

- Name: Ubiquitous public Internet

- Description: The Federal government constructs a national gigabit optical fiber

network with speeds upward of 50Mb. SMEs have access to fast affordable

broadband with low latency and are able to access all digital technologies in the

industry 4.0 transformation pack in order to improve business outcomes.

- Reason: As part of the policy objective for implementation of Industry 4.0, the

German government prioritizes the provision of adequate infrastructure. The

Internet must be available wherever Industry 4.0 application is used and it must

have sufficient transport capacity.

- Probability: 40%

Specification B

- Name: Limited and slow Internet

- Description: Private sector is not stimulated enough by government spending on

Internet infrastructure. This leads to a period of slow broadband network extension.

It is mainly focused on urban centers and individual rather than enterprise

customers. SMEs are left out of the Industry 4.0 transformation. Large companies

thrive by building their own fiber optic networks. Many SMEs fail in the face of

both local and foreign competition.

- Reason: Government efforts are inadequate to close the gap between the current

status of the national broadband network to the desired state for Industry 4.0.

- Probability: 60%

References

• Riegel, Lars; Schick, Michael (2016): The German Internet Industry 2016-2019.

Available online at https://international.eco.de/wp-content/blogs.dir/2/files/ecoadl-

internet-study-2016.pdf

41


Available online at



Descriptor name: Industry Partnerships


Current situation: Germany’s Platform Industrie 4.0 is the main example of an industry

partnership formed in response to demands for collaboration on a wide range of issue

connected to the industry 4.0 transformations. The platform convenes experts from

business, science, associations and the trade unions to develop operational solutions with

representatives from various federal ministries in thematic working groups.

Specification A

- Name: Public private partnerships develop infrastructure

- Description: Development of new infrastructure in response to rising demand

stimulated by the industry 4.0 transformations is achieved through public-private

partnerships. This makes it possible to make sure that there is no creation of

monopolies by large companies that disadvantage SMES with high connectivity

tariffs. SMEs benefit from low tariffs also resulting from the removal of the existing

monopolies of large network operators.

- Reason: Government is aware of SMEs financial limitations and considers the

expansion of the national digital infrastructure in the public´s interest and common

economic good.

- Probability: 50%

Specification B

- Name: Rise of industry monopolies

- Description: Large companies form partnerships through which they invest in

connectivity infrastructure that gives them a monopoly to the exclusion of SMEs.

SMEs face high tariffs to access high quality digital infrastructure.

42

- Reason: In addition to large companies having more financial resources available to

them, the telecommunications industry is dominated by large enterprises that

recognize control over the digital infrastructure. This creates a lasting competitive

advantage to large enterprises and guarantees access to the most important resource

in the digital age: data.

- Probability: 50%

References

• Federal Ministry of Economic Affairs and Energy Press Release (2016): Network

Alliance: 8 billion euros in 2016 for network expansion as telecommunications

companies continue their billion investments. Available online at

http://www.bmvi.de/SharedDocs/EN/PressRelease/2016/004-network-alliance-in-

brussels.html

• MacDougall, William, German Trade and Invest (2014): Industry 4.0, Smart

manufacturing for the future. Available online at

https://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/Broc

hures/Industries/industrie4.0-smart-manufacturing-for-the-future-en.pdf

• Walendowski, Jacek; Kroll, Henning; Schnabl, Esther (2016) : Industry 4.0,

Advanced Materials (Nanotechnology). Available online at http://bit.ly/2uNU0Pz

Descriptor name: Investment


Current situation: The industry 4.0 transformations require a much wider and faster

infrastructure than what German businesses count on up today. This has stimulated both

private and public investment in infrastructure in preparation to reap the benefits of the

digitalization. Large companies in the telecommunication industry and the government

dominate Germany´s infrastructural investment. The Ministry of Transport and Digital

Infrastructure started a network alliance for a digital Germany along with a number of trade

federations and various telecom companies. Companies have invested 12 billion in

broadband expansion and new mobile radio frequencies in 2015 and set 8 billion asides for

2016.

43

Specification A

- Name: Government stimulates investment in Infrastructure

- Description: In addition to the invest in affordable modern nationwide public

broadband, government stimulates the private sector to invest into areas where

investment in infrastructure would otherwise not be economically viable.

Government also extends grant and loan facilities to SMEs to invest in upgrades and

acquiring new infrastructure. SMEs have access to high-speed fiber optic data

highways and enough funding to upgrade own infrastructure.

- Reason: Investment in infrastructure is a matter of national importance and part of

the High tech strategy as a measure for stimulating matching private investment.

- Probability: 55%

Specification B

- Name: Limited investment in infrastructure

- Description: Government investment programs in industry 4.0 specific

infrastructures come to an end, which limits access to grants and loans for SMEs.

Private investors focus on the economical viable projects leaving many SMEs

outside metropolitan areas with no access to modern digital infrastructure. SMEs

finance infrastructure from their own limited resources.

- Reason: There is change in the Government Economic Policy. Government decides

against artificial demand creation and austerity measure like stimulus subsidies for

digital infrastructure projects due to economic pressures or change in political

agenda.

- Probability: 45%

References

• Kimmig, Anja (2015): Germany's high-speed Internet is lagging behind. Available

online at http://www.dw.com/en/germanys-high-speed-internet-is-lagging-behind/a-

18313138


Available online at

44



INTEGRATION

Descriptor name: Value Chain integration

Area of influence: Integration

Current situation: Nowadays we still have a very static value chain in SMEs, covering

from customer requirements to production. It is technically possible to customize products

by companies, however; it is still not possible for a customer to select freely their product’s

functions and all the features due to the high costs of production.

Specification A

- Name: Profitable customized production

- Description: Industry 4.0 will change the conventional value chain of SMEs in

Germany. The inter-company networks and value chain will be developed through

horizontal integration. It is possible for customers to acquire individual products

with customized features in all the phases of production. Talking from the

perspective of the SMEs, this customization of products will be possible and also

SMEs will be able to be aware of every detail of the manufacturing process and

smart products. With this horizontal integration, companies are able to control

individually every stage of their production semi-autonomously.

- Reason: Companies will be able to create value to customers and give a

competitive advantage, by offering products adapted to every requirement. Another

reason is better control of quality during the manufacturing process. It will be

profitable to manufacture one-off items and in very small quantities of goods for

very specific markets.

- Probability: 55%

Specification B

- Name: Mass Production by SMEs in Germany

45

- Description: SMEs will keep their mass-producing process without putting

emphasis in customized products. Networked value chain is not possible for SMEs

due to lack of balance in their interests with companies that belong to their value

chain. There is still not enough trust in the new systems and fear that other

companies, including suppliers, can steal their “know how”.

- Reason: Companies feel that their vulnerability is increased due to lack of enough

data security. Also the risks of a networked value chain are high since there is not

enough efficient infrastructure and one fail in the system affects the whole

production and generates high costs for all the companies involved. There are still

high costs and limited market potential. It is still too costly for a company to switch

into a different value chain.

- Probability: 45%

References:

• Kagermann, Henning; Wahlster, Wolfgang; Helbig, Johannes (2013): Securing the

future of German manufacturing industry. Recommendations for implementing the

strategic initiative INDUSTRIE 4.0. Edited by Ariane Hellinger, Veronika Stumpf.

acatech – National Academy of Science and Engineering. Frankfurt/Main.

Available online at

http://www.acatech.de/fileadmin/user_upload/Baumstruktur_nach_Website/Acatech

/root/de/Material_fuer_Sonderseiten/Industrie_4.0/Final_report__Industrie_4.0_acc

essible.pdf

• Jesse, N. (2016). Internet of Things and Big Data – The Disruption of the Value

Chain and the Rise of New Software Ecosystems. IFAC-PapersOnLine, 49(29),

275–282.

Descriptor name: Vertical Integration


Current situation: The majority of SMEs do not have full vertical integration. There is

only integration in the shop floor of companies and not between production processes and

business processes. Companies still believe this is not yet priority, since they have been

working successfully without a full vertical integration, most of the time due to its size.

46

Specification A

- Name: Full vertical Integration within the organization

- Description: Smart factories will have no predefined and fixed manufacturing

structures. There will be an integration of the different IT systems that are used in

different stages of the manufacturing and business processes, which includes

exchange of materials, energy and information within all departments in a company.

- Reason: Full integration allows SMEs to have access to an early verification of

production processes, such as decisions in the design phase. This end-to-end

transparency is made in real time. It also allows more flexible responses to

disruptive changes and optimization along the company, which gives them more

efficiency and coordination along the organization.

- Probability: 40%

Specification B

- Name: Slow integration of CPS within an organization

- Description: The development of smart factories with full integration of the

manufacturing systems with business processes will take a slow pace. Most of

SMEs do not have a full-networked integration within the company. SMEs will not

believe yet that this integration is necessary due to their size and already established

coordination of the company. This full integration represents big changes that take

time and focus.

- Reason: Costs of investment are still too high. There is uncertainty from SMEs in

the implementation of CPS within the company. SMEs prefer to wait until other

companies invest in CPS and show that these disruptive changes are actually

happening and are necessary for their survival.

- Probability: 60%

References:





47

Available online at



essible.pdf

Descriptor name: Resource and Energy Efficiency of German SMEs


Current situation: There is still production line or parts that consume and run with high

quantity of energy not only during working days but also during breaks, weekends and

shifts where there is no production. Even though, companies, especially SMEs, still look to

deliver the highest output of products (resource productivity) using the lowest possible

amount of resources in order to deliver a particular output (resource efficiency).

Specification A

- Name: Resource and energy efficiency strategies

- Description: Industrie 4.0 will make possible for companies to deliver gains in

resource productivity and efficiency. SMEs, which already adopted CPS, will be

capable to have manufacturing processes that can be optimized in terms of their

resource and energy consumption. This goes along with vertical and horizontal

integration where the aim is not only to be able to produce profitable one off items

and a more efficient and coordinated integration of floors within a company, but

also efficiency in the productivity of companies.

- Reason: For SMEs, energy and production efficiency is one of the most important

topics. Energy efficiency is already an important requirement for machinery in

Germany. Besides, there is a new social-technical interaction between all the actors

and resources involved in manufacturing.

- Probability: 60%

Specification B

- Name: Lack of production and energy efficiency

- Description: SMEs don’t adopt Industry 4.0 technologies and hence, cannot

control every phase of their production and it becomes more difficult to implement

48

strategies for resource and energy efficiency. Furthermore, SMEs do not take as

priority the resource and energy efficiency within their production.

- Reason: SMEs are not able to adopt Industry 4.0 technologies because they don’t

either count with the money or the belief in them. Without these technologies they

cannot implement full integration of their value chain and within the company and

hence, be able to control exactly every phase of their production in real time.

- Probability: 40%

References:





Available online at



essible.pdf

Descriptor name: Collaboration of SMEs through clusters


Current situation: Over the last few years, Government, both federal and state, have been

promoting diverse projects that have the objective to create networks and clusters that

promote new technologies. These Networks and clusters include industrial and academic

institutions in all their research and development activities. It is known that there are

already various programs that promote the development of clusters structures that can

strengthen cooperation between research and industry.

Specification A

- Name: Increased collaboration between SMEs

- Description: There will be an increased development of new platforms, through

clusters, via which SMEs can network and set standards between them. This is the

result of Government’s efforts to create and strengthen networks among SMEs.

49

With this increased networks, SMEs can collaborate between them easier and safer.

There is benefits obtained form these collaborations.

- Reason: SMEs consider these networks as drivers and the base of digitization, and

in order to adopt more successfully the new industrial revolution. Therefore, they

are considerable necessary for Germany’s digital future.

- Probability: 35%

Specification B

- Name: Weak collaboration between German SMEs

- Description: SMEs will have difficulties in establishing networks with other

German companies for collaboration. Therefore, clusters and networks are not

strong enough to bring benefits to companies and increase collaboration between

them. Due to this lack of collaboration, it is difficult for them to adopt fully the 4th

industrial revolution.

- Reason: There are doubts and disbeliefs regarding the lack of data protection and

know-how of every company. They still don’t see the benefits of collaborating

between them and do not believe yet in the benefits that can be obtained from the

4th industrial revolution.

- Probability: 65%

References:






4/10/2017.

• Prause, G. (2015). Sustainable business models and structures for industry 4.0.

Journal of Security and Sustainability Issues, 5(2), 159–169.

https://doi.org/10.9770/jssi.2015.5.2(3)

• “Future of the German Mittelstand” Action Programme (May 2016). In : Spree

Druck Berlin GmbH. Available online at

50

https://www.bmwi.de/Redaktion/EN/Publikationen/aktionsprogramm-zukunft-

mittelstand.pdf?__blob=publicationFile&v=6, checked on 4/10/2017.

Descriptor name: New business models adopted by German SMEs


Current situation: Business models have been changing due to the last transformation, as

it was the inclusion of the Internet and smart phones. However, only one in five companies

in Germany has adapted its business model to the possibilities offered by digitalization.

Specification A

- Name: Disruptive Service design model

- Description: Disruptive Service design model is based on the idea that a customer

can buy a product for a fixed price but this includes the option to give it back to the

producer after certain time of use. It is the service what it is purchase or rented

rather than the product itself.

- Reason: TDisruptive Service design model is convenient for many SMEs, since it

results in a sustainable product that has certain lifetime and this is becoming more

competitive than the traditional way to buy and trash a product after usage. All this

is a possible thanks to the cross-company operations and the resulted networked

value chain. The involvement of CPS makes possible to track the full production

process.

- Probability: 20%

Specification B

- Name: One-off production business model

- Description: SMEs develop new business models in order to meet any last minute

requirement that any customer demand in-store. That’s the possible to do with

Industry 4.0 technologies. Value creation and capture also turns into the customized

production. There will be a highly dynamic network of business rather than just one

company implementing this business model.

- Reason: For companies this business model results profitable since it is possible to

customize its products without costs. It becomes priority to deliver value through

51

the customization of the products. In addition the costs saved in workforce is

attractive for companies.

- Probability: 30%

Specification C

- Name: Traditional business models

- Description: Companies will continue with the same business models based on

selling products on large scale. SMEs will still prefer to keep using their traditional

business models, which have given them success and trust.

- Reason: SMEs do not count with a full-networked value chain what makes not

possible to cope with the new emerging business models. Furthermore, SMEs do

not trust yet in the adoption of new technologies that enable the full integration of

their value chain.

- Probability: 50%

References:

• Prause, G. (2015). Sustainable business models and structures for industry 4.0.

Journal of Security and Sustainability Issues, 5(2), 159–169.

https://doi.org/10.9770/jssi.2015.5.2(3)

• Ferber, S. (2015). How the Internet of Things Changes Everything. Harvard

Business Review Blog , 1-5.

• Federal Ministry for Economic Affairs and Energy . (2016). DE.DIGITAL.

Obtained from: WWW.BMWI.DE

EDUCATION AND QUALIFICATION

Descriptor name: Employee Development

Area of influence: Education & Qualification

Current situation: SMEs present a deficiency in trained staff capable to cope with

demanding technologies. Therefore, they have an increased need in support for future

training and knowledge in order to develop all the necessary skills effectively and at the

same time, be able to cope with the increase complexity of future production systems.

52

Specification A

- Name: Partnerships with Higher Education Institutions

- Description: SMEs are participants in training partnerships with Higher Education

Institutions to develop all the necessary skills that their employees need to keep up

with the increased complexity of production processes. The partnership consists of

the dual education where Higher Education Institutions provide technologies

necessary to teach students so that they can later practically apply obtained skills

within the organization.

- Reason: SMEs do not have enough capacity to train their staff in-house;

consequently, they must complement it with support from Education Institutions.

On the other hand, Government will subsidize Higher Education Institutions with

the newest technologies, in order to have prepared workforce. This is favorable for

SMEs that do not invest yet in these technologies.

- Probability: 50%

Specification B:

- Name: Cooperation between SMEs for employees’ development

- Description: Companies located in the same region cooperate on projects and

share the commitment to the generation of skilled workers. This is possible with the

creation of clubs where companies transfer employees in order to learn from other

companies’ employees. There are better and more efficient standards on what is

important for employees to learn.

- Reason: Companies that are located in the same area collaborate through cluster

and industry associations already and it is less costly than investing in training

within the company.

- Probability: 20%

Specification C

- Name: In-house development.

- Description: The development of workforce regarding the changes that Industry 4.0

carries is not a top priority for SMEs. Training programs remain internally

53

developed and focused on present business needs with no regard to future

requirements.

- Reason: SMEs work at full capacity and are financially constrained; therefore they

cannot focus on activities, like extra training, not related to the everyday-business

tasks. In addition they have also not yet acquired Industry 4.0 technologies like.

- Probability: 30%

References:

• "Acatech. (2016). Skills for Industrie 4.0. Training requirements and solutions.

Acatech . Munich : acatech (Ed.).

• Faller, C., & Feldmüller, D. (2015). Industry 4.0 Learning Factory for regional

SMEs. Procedia CIRP, 32, 88-91.

Descriptor name: Skills needed


Current situation: SMEs employees are highly specialized in technical and domain-

knowledge skills. It is still not prioritized the development of social-intercultural skills in

highly technological SMEs. It is forecasted that employees will need specific social skills

to cope with the new challenges regarding technological and organizational development.

Specification A

- Name: Strong social, personal and intercultural approach.

- Description: Companies put greater emphasis on the development of

interdisciplinary, metacognitive and social skills as opposed to the previous

technical focus. Employees concentrate more on creative, innovative and

communicative activities. This emphasis has occurred due to an increased

collaboration between companies and the extended free time that CPS allows

employees to have. Companies implement this approach also due to high interests in

open innovation activities.

- Reason: Social skills are mostly developed by SMEs due to their close customer-

service approach. Routine activities are mostly replaced by machines, which also

include monitoring tasks. This pattern aims to build and maintain networks of

54

experts where cooperation can aid finding solutions for particular problems or

increased innovation within and between companies.

- Probability: 20%

Specification B

- Name: Integrated engineering skills

- Description: Intercultural and communication skills are not a priority for SMEs in

Germany. Technological and Knowledge-based skills are still more important and

considered as the foundation for coping with the increasing complexity that CPS

and new technologies have.

- Reason: As machines start to take over the so-called “easy jobs or shop floor jobs”,

companies demand highly technical qualified workers that are capable to adopt the

new technologies, thus, all efforts are mainly focused either in the development of

these skills or in acquiring employees with these qualifications.

- Probability: 30%

Specification C

- Name: Balanced Approach of technical and social skills

- Description: Companies attach equal importance to the development of all the

different social and technical skills that workers need to cope with the challenges

and changes that Industry 4.0 brings. For SMEs is important that employees are

ready to fill their position in Industry 4.0, meaning that all existing gaps in

competencies (Social, personal and technical) are closed.

- Reason: SMEs identify the most important competencies for Industry 4.0, taking

into consideration the fact that every job profile will require different skills. Thus,

skills will be evaluated according to every job profile and department.

- Probability: 50%

References:

• Glas, A. H., & Kleemann, F. C. (2016). The Impact of Industry 4.0 on Procurement

and Supply Management: A Conceptual and Qualitative Analysis. International

Journal of Business and Management Invention ISSN (Online), 54, 2319-8028.

55

• Hecklau, F., Galeitzke, M., Flachs, S., & Kohl, H. (2016). Holistic Approach for

Human Resource Management in Industry 4.0. Procedia CIRP, 54, 1-6.

• Stefan Heng (2014): Industry 4.0 Upgrading of Germany’s industrial capabilities on

the horizon. Edited by Lars Slomka. Deutsche Bank Research. Available online at

https://www.dbresearch.com/PROD/DBR_INTERNET_EN-

PROD/PROD0000000000333571.pdf, checked on 4/10/2017.

Descriptor name: Attitude towards change


Current situation: In Germany SMEs, specifically the so-called “Hidden Champhions”

have been capable to cope with the transformative changes that have been presented in the

recent years and had become market leaders in their niche.

Specification A

- Name: Opposition to the change within a company

- Description: There is conflict between existing structures and processes and the

implementation of change. Company structures remain conservative and moreover,

employees are opposed to the full digitalization of their tasks.

- Reason: Opposition toward change among employees is born from the fear of

losing their jobs or their responsibilities are curtailed. For employees, full

digitalization presents a latent threat.

- Probability: 50%

Specification B

- Name: Proactive approach to change within a company

- Description: SMEs take a proactive approach towards the changes forecasted and

needed in order to adopt the new technologies, business models and practices that

industry 4.0 carries. All employees feel the need to keep up with the disruptive

changes that the 4th industrial revolution involves in order to survive in the market.

There is a general motivation and excitement towards these changes.

56

- Reason: It is identified from top floor to shop floor that disruptive changes are

necessary in order to remain competitive as a company and they are seen as a tool

for more efficient and sustainable production.

- Probability: 50%

References:





• Hodges, J. (2016). Managing and Leading People Through Organizational Change.

• Simon, H. (2009). Hidden Champions of the Twenty-First Century. Springer-Verlag

New York.

Descriptor name: Employees’ Autonomy


Current situation: The continuous technological and organizational changes in the

workplace impose challenges for SMEs on an employee level. Digitization is currently

changing the role and distribution of work for employees. Therefore, it is changing the way

their work life is distributed.

Specification A

- Name: More flexibility in the workplace

- Description: Workers have more personal flexibility regarding work time, work

content and work place. They are able to have greater autonomy and more

opportunities for self-development. CPS allows them to have more free time for the

development of complementary activities.

- Reason: Smart production allows flexible-working conditions. It is possible to have

a greater compatibility between work and personal needs. Employees have enough

flexibility for continuous self-development that will keep them working and

productive for longer.

57

- Probability: 60%

Specification B

- Name: Employees’ autonomy constraints

- Description: It is possible for companies to use the new technology for very

different purposes. Systems can be set up to impose restrictive control over every

minute detail of a person’s work. Furthermore, companies do not only control and

manage every single process of the production but also of their personnel’s

performance.

- Reason: Workers are monitoring through managers and not by the technology. This

is because there is an increased tension between the virtual world and the world of

worker’s own experience.

- Probability: 40%

References:





Available online at



essible.pdf

Descriptor name: Demographic changes


Current situation: Germany has an aging workforce phenomenon. The government

expects the population to shrink from 81m to 67m by 2060. Businesses are reporting

particular difficulty filling vacancies in a wide range of technical professions and in the

healthcare sector. By 2050, under current employment patterns, the working age population

(15-64) is expected to have fallen by 14.8 million. This will weaken economic growth and

affect the sustainability of public social expenditures. Small and medium-sized companies

58

in the manufacturing industry, where business owners have an average age of 54 and are

becoming victim to demographic change particularly swiftly.

Specification A

- Name: Extended talent pool for SMEs

- Description: There are an increased number of refugees and immigrants in

Germany, which incentives government investment in labor market integration

efforts. Most refugees and asylum seekers are successfully integrated into the

German labor market. SMEs are able to replenish their aging talent base.

Demographic shifts in German society have no effect of labor availability for

SMEs. There is no pressure on SMEs to automate or adopt high cost new

technologies designed to replace humans.

- Reason: Germany is the biggest refugee and asylum seeker destination. The

government recognizes the long-term economic benefit of integrating the new

comers into the labor force just as the social danger of leaving many out of the work

force is clear. The German government has a lot of experience to draw from having

had many waves of immigrants.

- Probability: 50%

Specification B

- Name: SMEs automate to overcome lack of workforce

- Description: Advanced automation and CPS technologies are adopted by SMEs,

they require smaller and highly skilled workforce. They focus on upgrading skills

and lifelong learning using advanced learning methods like virtual learning.

Assistance systems are applied in order to improve utilization and extend productive

lives of employees.

- Reason: Companies with highly automated production processes require a

declining number of employees.

- Probability: 50%

References:

• Bräuninger, Dieter (2013): Medium-sized enterprises and demographics. Increasing

pressure to take action. Available online at

59

https://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD00000000

00304451/Medium-sized_enterprises_and_demographics%3A_Increas.PDF

• OECD (2014): “Better Policies” Series Germany keeping the edge: competitiveness

for inclusive growth. Available online at https://www.oecd.org/germany/Better-

policies-germany.pdf

• Schwartz, Michael; Gerstenberger, Juliane (2015) : Ageing of German SME owners

is putting a dampener on investment. Available online at

https://www.kfw.de/PDF/Download-Center/Konzernthemen/Research/PDF-

Dokumente-Fokus-Volkswirtschaft/Fokus-englische-Dateien/Fokus-Nr.-85-

M%C3%A4rz-2015_EN.pdf

• Heng, Stefan (2014): Industry 4.0 Upgrading of Germany’s industrial capabilities

on the horizon. Available online at

https://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD00000000

00333571.pdf

• Schröder, Christian (2016): The Challenges of Industry 4.0 for Small and Medium-

sized Enterprises. Available online at http://library.fes.de/pdf-files/wiso/12683.pdf

FINANCE

Descriptor name: Access to financial resources

Area of influence Finance

Current situation: Small and medium-sized enterprises in Germany need access to

financial resources in order to be able to innovate and invest into digital technologies, and,

consequently increase long-term competitiveness. Overall, large SMEs have historically

good access to loans and there are almost no denials from banks, however, micro-

businesses with fewer than five employees experience difficulties accessing loans.

Specification A

- Name: Internal financing

- Description: Despite extensive financial instruments available on the capital

market, both from the public and private sectors SMEs consider internal financing

to be the main source of funding Industry 4.0 technologies. SMEs cannot achieve

60

agreements with banks on investment loans and to get access to public subsidy loan

programs, therefore, share of loans in the capital structure of SMEs declines. In

addition, very small enterprises with fewer than ten employees do not demonstrate

the necessary capacities for the implementation of the innovation project and to

fulfill market orders.

- Reason: Many SMEs cannot easily afford to provide application for grants for R &

D projects because of comprehensive documentation regarding the investment

project, as well as, their financial situation and collateral in order to prove credit

worthiness. Thus, innovations are often financed from own resources.

- Probability: 55%

Specification B

- Name: External funds

- Description: SMEs in Germany need access to sound finance what is the main

prerequisite that enables companies to invest in Industry 4.0 technologies, and thus

for the long-term competitiveness. KfW and Landesbanken expand the market for

SMEs by making funds available and offering co-financing of private equity

investments at all stages of entrepreneurial development what is particularly

relevant for implementation of Industry 4.0 technologies associated with a high

capital requirement. KfW entrepreneurial credit provides SMEs with funds for

maximum five years to cover their investment costs on Industry 4.0 technologies

that cannot be capitalized as non-current assets, whereas, ERP innovation program

enables SMEs whose degree of innovation is too small for the subsidy programs

(such as ZIM (Central Innovation Program for SMEs)) to operate both near-market

research and development, and to invest in Industry 4.0 machinery and equipment.

- Reason: Industry 4.0 solutions require large investments, which SMEs often cannot

finance due to limited capacity of their financial resources. Major investments in

machinery and equipment can be funded through research and innovation programs

because they are often the largest financing component of an innovative

development in addition to the cost of launching new products, technologies and

services. Moreover, KfW entrepreneurial loan allows the financing of soft costs.

- Probability: 45%

61

References:










4/10/2017.

Descriptor name: Attitude toward investments and risks


Current situation: In the last three years around four in five SMEs carried out digitization

projects, however, they invested comparatively low amount, with almost half investing less

than EUR 10,000 a year. Overall, SMEs’ investments in digitization projects are total

around EUR 10 billion a year.

Specification A

- Name: Risk averse attitude of SMEs

- Description: Negative business expectation caused by demographic change toward

altering small and medium-sized enterprises decreases the propensity to invest in

Industry 4.0 technologies and projects associated with long payback period and

uncertainty of potential future profits of investments.

- Reason: Older entrepreneurs having reached high age avoid long-term financial

obligation, therefore, their incentives to invest in long-term project are respectively

low.

- Probability: 40%

Specification B

- Name: Optimistic attitude towards risk

62

- Description: Optimists mainly represented by start-ups invest in Industry 4.0

technologies in order to improve their competitiveness in a long run.

- Reason: Young, agile and innovative companies that will be tomorrow’s

Mittelstand mainly represent Start-ups. This is immense importance for the German

economy, competitiveness and job creation.

- Probability: 60%

References:





• KfW SME Panel 2016 (2016). Annual analysis of the structure and development of

SMEs in Germany. Available online at https://www.kfw.de/KfW-Group/KfW-

Research/KfW-Mittelstandspanel.html, checked on 4/10/2017.

Descriptor name: Venture capital.


Current situation: For young, innovative companies, the availability of venture capital is

essential. This is an area in which Germany lags well behind other countries. The lack of

venture capital in Germany creates a risk that young, innovative firms will be unable to

grow or will relocate out of Germany. To respond to the changed competitive conditions of

the digital age with its disruptive innovations, the Economic Affairs Ministry is providing a

total of some €2 billion to strengthen the venture capital market.

Specification A

- Name: Boost of venture capital market.

- Description: Germany becomes to be internationally competitive and attractive for

venture capital investments. Consequently, venture capital enables innovative

SME’s to utilize business opportunities provided by digitization through sharing

high average risks of Industry 4.0 projects.

63

- Reason: The Economic Affairs Ministry continues to provide financial support and

offer measures in order to strengthen the venture capital market in the era of

disruptive innovation that has changed competitive conditions. Furthermore, the

“INVEST venture capital grant” provides stimulus for business angels, such as an

increase of investment sum and reimburse of taxes to encourage them to invest in

innovative companies.

- Probability: 20%

Specification B

- Name: Lack of venture capital.

- Description: Venture capital market hardly plays a role in German financial

system; thus, venture capital firms reduce the amount of the capital that they

provide to SMEs’. As a result, SMEs bare higher risks and uncertainty while

implementing Industry 4.0 technologies.

- Reason: Venture Capital companies require a high growth rate for potential target

companies to cover the high costs of selecting and maintaining the investments.

However, high uncertainty regarding Industry 4.0 project does not guarantee high

profitability that covers all risk associated with it. In addition, Venture Capital

requires the readiness to delegate control and ownership rights of SMEs.

- Probability: 80%

References:

• Bundesministerium der Finanzen (2015): Promoting venture capital in Germany,

9/16/2015. Available online at

http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Financ

ial_markets/Articles/2015-09-16-promoting-venture-capital.html, checked on

4/11/2017





64

• Acevedo, Miguel Fernández; Adey, Matt; Bruno, Claudio; Bufalo, Gino; Gazaniol,

Alexandre; Lo, Vivien et al. (2016): Building Momentum in Venture Capital across

Europe. France, Germany, Italy, Spain and the United Kingdom. KfW. Available

online at https://www.kfw.de/PDF/Download-

Center/Konzernthemen/Research/PDF-Dokumente-Studien-und-

Materialien/Building-Momentum-in-Venture-Capital-across-Europe.pdf, checked

on 4/11/2017.

POLITICS

Descriptor name: National Initiative

Area of influence: Politics

Current situation: Currently, numerous information and advisory initiatives are being

developed on Industry 4.0 and digitization in SMEs. Four Mittelstand 4.0 Agencies work

to develop solutions regarding digitalization and eBusiness involving stakeholders, such as

associations and business chambers. The Mittelstand 4.0 Competence Centers raise

awareness about digitalization among companies and provide information, training, and the

opportunity for companies to view and test new solutions out in practice across the various

regions. However, a national program for promotion of Industry 4.0 in small and medium-

sized enterprises does not yet exist.

Specification A

- Name: Initiative Industry 4.0 in the German Mittelstand

- Description: The existing programs or elements of existing programs that support

the introduction of industry 4.0 technologies to SMEs are bundled and set up a

concerted initiative "Industry 4.0 in the German Mittelstand". The major focus is

Industry 4.0 competence centers that are located in such way that interested SME

can easily get in contact with them. All competence centers provide an individual

and comprehensive consultation regarding aspects of Industry 4.0. For efficiency

reasons consultations on advanced questions are done considering thematic and

technological specialization.

65

- Reason: All actors - science, business, associations, chambers, networks, etc.

contribute actively to shape political framework for a concerted initiative "Industry

4.0" in five dimensions: Reference architectures, standards and norms, Research and

innovation, Security of networked systems, Legal framework, Work, education and

training. It is recognized that Industry 4.0 must be adopted In order to maintain and

expand this competitive strength of German industry.

- Probability: 80%

Specification B

- Name: Sustainable Development Strategy

- Description: German in collaboration with other world leading economies adopted

the 2030 Agenda for Sustainable Development approaching 17 global goals that

require close cooperation between governments, the civil society, the private sector

and science all around the globe. The sustainable development strategy includes

three aspects of sustainability, namely, economic efficiency, social balance and

environmentally stable development, thus, the government undertakes holistic

measurements and forwards financial funds on climate and biodiversity protection,

resource efficiency, health, education and anti-corruption policies. Consequently,

taking into consideration this shifting priority, SMEs are less supported by the

government on their way towards digitization and Industry 4.0 transformation.

- Reason: Industry 4.0 and the programs such as “Mittelstand-Digital” and “KMU-

innovativ” are one of the forward-looking programs of sustainable development

strategy, however German government prioritize and support areas of ecological

protection and social development in order to fulfill the obligations of the 2030

Agenda for Sustainable Development.

- Probability: 20%

References:

• „Erschließen der Potenziale der Anwendung von Industrie 4.0‘ im Mittelstand“

(Juni 2015). Studie im Auftrag des Bundesministeriums für Wirtschaft und Energie



66


4/10/2017.





• The Federal Government (1/11/2017): German Sustainable Development Strategy.

Summary. Available online at

https://www.bundesregierung.de/Content/DE/_Anlagen/2017/02/2017-02-27-

nachhaltigkeit-neuauflage-engl.pdf?__blob=publicationFile&v=1, checked on

6/12/2017.

Descriptor name: Change of legal basis

Area of influence Politics

Current situation: Development of new technologies has risen new questions concerning

liability, consumer and data protection, etc. which require revision and adaptation of the

legal basis. Furthermore, the extensive exchange of data that accompanies Industry 4.0 also

makes users an attractive target for hackers. These attacks can be targeted not only on theft

of valuable data, but also on damaging the entire manufacturing process, causing risks to

economy of the country. Therefore, legislation regarding data security, IT security and IP

law has been identified as risks what explains the skepticism of SMEs concerning industry

4.0.

Specification A

- Name: EU legislation

- Description: A comprehensive research on Industry 4.0 carried out, which

identifies, analyzes, reviews and provides legal reference models for the industry

that complete Machinery Directive of the EU, the product safety law and the

Machinery Ordinance. European legislation and European initiatives develop

directive on protection of trade secrets regarding know-how and parts of the

67

European Commission’s Digital Agenda in the area of IP law. There is also a shift

from legal operations toward more technical such as a legal obligation to take IT

security into account when software, products and systems are being designed

(“security by design”). The European Institute for Telecommunications Standards

(ETSI) develops an interface for international standardization, so-called "machine-

to-machine" (M2M).

- Reason: Due to technological excellence, German industry is capable to develop

digitally based innovations and business models with the world industrial leaders.

However, this development requires change of legal basis and closer examination in

order to reveal industry-relevant aspects that cover broad areas of the law such as

labor, insurance, computer, internet, competition and antitrust as well as data

protection and many other areas.

- Probability: 45%

Specification B

- Name: Hampered transition to Industry 4.0.

- Description: In the area of IT security the EU’s NIS directive disharmonize

European and national IT security provisions what leads to conflicts between the

interest of users and companies in a common Digital Single Market and the interests

of the national industry regarding the transition to Industry 4.0.

- Reason: European legislation loses sight of the needs of businesses and focuses

more on new laws rather than on harmonization of existing national legislation.

- Probability: 55%

References:

• „Erschließen der Potenziale der Anwendung von Industrie 4.0‘ im Mittelstand“

(Juni 2015). Studie im Auftrag des Bundesministeriums für Wirtschaft und Energie




4/10/2017.

68

• Plöger, Iris; Sahl, Jan Christian; Willems, Heiko; Bräutigam, Peter; Hinerasky,

Christiane; Klindt, Thomas (Eds.) (2015): Industrie 4.0 – Legal challenges of

digitalisation. An input for the public debate. Bundesverband der Deutschen

Industrie e. V. (BDI), Noerr LLP. Berlin.

69

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Industry 4.0 Scenario Planning How will the industry 4.0 transformations affect SMEs in Germany

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